III-2.2 SCHEDULE 13D AND 13G ISSUES. Presenters: Robert L. Kimball, Vinson & Elkins Michael G. Keeley, Norton Rose Fulbright

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1 III-2.2 SCHEDULE 13D AND 13G ISSUES Presenters: Robert L. Kimball, Vinson & Elkins Michael G. Keeley, Norton Rose Fulbright SEC Hot Topics Institute Dallas, TX September 8, 2016

2 SCHEDULE 13D AND 13G ISSUES SEC Hot Topics Institute Dallas, Texas September 8, 2016 Robert L. Kimball Vinson & Elkins LLP Michael G. Keeley Norton Rose Fulbright

3 DISCLAIMER These materials are intended for educational and informational purposes only and do not constitute legal advice. These materials represent the views of and summaries prepared by the authors and do not necessarily reflect the opinions or views of their respective firms. Proprietary 2016 Vinson & Elkins LLP

4 OVERVIEW I. Proper Calculation of Beneficial Ownership II. Schedule 13D vs. Schedule 13G III. Pre-IPO 5% Owners and Schedule 13G IV. Measuring 1% and 2% Tests V. Meaning of Promptly VI. Group Formation VII. Purpose or Effect of Changing/Influencing Control VIII.Dual Class Issues in IPO IX. General Instruction C X. Hypotheticals for Discussion Proprietary 2016 Vinson & Elkins LLP

5 PROPER CALCULATION OF BENEFICIAL OWNERSHIP

6 PROPER CALCULATION OF BENEFICIAL OWNERSHIP In determining the percentage of a class of securities beneficially owned, a reporting person divides the number of outstanding securities of such class, exclusive of any securities of such class held by or for the account of the issuer or a subsidiary of the issuer (i.e., exclusive of treasury shares). Exchange Act Section 13(d)(4). If a reporting person has the right to acquire beneficial ownership of securities within 60 days, such number is added to the number of shares of the issuer outstanding (i.e., the denominator), but only for purposes of calculating such reporting person s beneficial ownership percentage (i.e., such securities need not be added to any other reporting person s denominator). See Rule 13d- 3(d)(1). Proprietary 2016 Vinson & Elkins LLP

7 PROPER CALCULATION OF BENEFICIAL OWNERSHIP Example: Company A has 1,000,000 shares of common stock outstanding. Shareholder B owns: 50,000 shares of common stock. Options to acquire 50,000 shares of common stock. B s options were granted January 1, 2014, and vest in 20% increments (10,000 shares) on each of the first five anniversaries of the date of grant. Warrants to acquire 30,000 shares of common stock, all of which are currently exercisable. Shareholder C owns: No shares of common stock. Options to acquire 75,000 shares of common stock. C s options were granted May 1, 2014, and vest in 20% increments (15,000 shares) on each of the first five anniversaries of the date of grant. 5,000 shares of preferred stock that are currently convertible into 25,000 shares of common stock. Proprietary 2016 Vinson & Elkins LLP

8 PROPER CALCULATION OF BENEFICIAL OWNERSHIP B s beneficial ownership as of April 15, 2016, is calculated as follows: 50, ,000 (1) + 30,000 (2) 100,000 = 1,000, ,000 (1) + 30,000 (2) 1,050,000 = 9.5% (1) Shares issuable pursuant to options that are currently exercisable; no additional options will become exercisable within 60 days of April 15, (2) Shares issuable pursuant to warrants. C s beneficial ownership as of April 15, 2016, is calculated as follows: 30,000 (1) + 25,000 (2) 55,000 = 1,000, ,000 (1) + 25,000 (2) 1,056,000 = 5.2% (1) Shares issuable pursuant to options that are currently exercisable; no additional options will become exercisable within 60 days of April 15, (2) Shares issuable pursuant to warrants. Proprietary 2016 Vinson & Elkins LLP

9 SCHEDULE 13D vs. SCHEDULE 13G

10 SCHEDULE 13D vs. SCHEDULE 13G Persons who become the beneficial owners of more than 5% of a class of equity securities registered under the Exchange Act must file a statement on Schedule 13D unless they qualify to file on Schedule 13G or are exempt from filing altogether. Schedule 13G is considered a short-form filing because it requires information similar to, but less than, what is required on Schedule 13D. There are three categories of persons who qualify to file on Schedule 13G: Qualified Institutional Investors Passive Investors Exempt Investors Proprietary 2016 Vinson & Elkins LLP

11 SCHEDULE 13D vs. SCHEDULE 13G Qualified Institutional Investors are persons who: acquired securities in the ordinary course of business and not with the purpose or effect of changing or influencing control of the issuer (or in connection with or as a participant in any transaction having such purpose or effect); and are one of the following: (a) registered broker dealer; (b) bank; (c) insurance company; (d) registered investment company; (e) registered investment advisor; (f) ERISA employment benefit plan; (g) parent holding company or control person, subject to 1% rule; (h) savings association; (i) church plan; (j) a non-u.s. institution that is the functional equivalent of any of the foregoing; or (k) a group consisting solely of the foregoing. Proprietary 2016 Vinson & Elkins LLP

12 SCHEDULE 13D vs. SCHEDULE 13G Passive Investors are persons who: are not Qualified Institutional Investors; have not acquired securities with the purpose or effect of changing or influencing control of the issuer (or in connection with or as a participant in any transaction having such purpose or effect); and beneficially own less than 20% of the class. Exempt Investors are persons who, as of the end of a calendar year, are or become the beneficial owners of more than 5% of the class and are not required to file a Schedule 13D because such person: is an issuer who acquired the securities pursuant to a registered stock-for-stock exchange; acquired 2% or less of the class of securities during the preceding 12 months; or is otherwise not required to file a Schedule 13D. Proprietary 2016 Vinson & Elkins LLP

13 PRE-IPO 5% OWNERS & SCHEDULE 13G

14 PRE-IPO 5% OWNERS & SCHEDULE 13G Pre-IPO 5% owners typically qualify as Exempt Investors and may usually file on Schedule 13G instead of Schedule 13D Exempt Investors are persons who, as of the end of a calendar year, are or become the beneficial owners of more than 5% of the class and are not required to file a Schedule 13D because such person: is an issuer who acquired the securities pursuant to a registered stock-forstock exchange; acquired 2% or less of the class of securities during the preceding 12 months; or is otherwise not required to file a Schedule 13D (e.g., a person who holds more than 5% of a class of securities of an issuer prior to/at the time the issuer registers such class under Section 12 i.e., prior to/at the time of an IPO). See Rule 13d-1(d); see also Section 13(d) C&DI Question Proprietary 2016 Vinson & Elkins LLP

15 PRE-IPO 5% OWNERS & SCHEDULE 13G Note that an Exempt Investor who, after an IPO but before filing a Schedule 13G, acquires additional securities that, when aggregated with other purchases during the preceding 12 months (including the IPO and pre-ipo period), exceeds 2% of the class must file a Schedule 13D. If an Exempt Investor forms a group with another individual or entity that is the beneficial owner of 2% or more of the class of securities, and the Exempt Investor is deemed to have voting or investment power over such securities, the Exempt Investor would be deemed to have acquired more than 2% of the class of securities and would therefore be required to file a Schedule 13D. A Schedule 13G need only be filed by an Exempt Investor if its beneficial ownership is greater than 5% as of the end of the calendar year. Rule 13d- 1(d) provides that a Schedule 13G is required if such person is or becomes directly or indirectly the beneficial owner of more than five percent of the relevant class of securities as of the end of any calendar year. Proprietary 2016 Vinson & Elkins LLP

16 MEASURING 1% AND 2% TESTS

17 MEASURING 1% TEST Rule 13d-2(a) provides that [a]n acquisition or disposition of beneficial ownership of securities in an amount equal to one percent or more of the class of securities shall be deemed material, triggering an amendment to Schedule 13D. The relevant percentage is the number of securities acquired/disposed of divided by the number of securities outstanding before the first such acquisition/disposition (i.e., not the change in the reporting person s beneficial ownership percentage). For example, if a reporting person holds 7,000 out of 100,000 outstanding shares (7%), the issuer issues another 20,000 shares, and the reporting person acquires 1,400 of such shares (7% of the issued shares), the reporting person still holds 7% of the outstanding shares (8,400/120,000). However, for purposes of determining whether the reporting person has acqui[red] or dispos[ed] of beneficial ownership of securities in an amount equal to one percent or more of the class, the reporting person must divide the amount acquired (1,400) by the amount outstanding preissuance (100,000), which results in a 1.4% change and triggers an obligation to file an amendment. Proprietary 2016 Vinson & Elkins LLP

18 MEASURING 1% TEST Additionally, the deviation from the reporting person s ownership percentage as reported on the most recently filed Schedule 13D (or amendment) is not the relevant percentage, but rather the difference between the maximum and minimum number of shares held at any given time following the most recent filing. For example, if a reporting person holds 7.0% of the relevant class of securities, makes an acquisition that increases its ownership percentage to 7.5%, and then makes a disposition that reduces its ownership percentage to 6.1%, it has a reporting obligation despite never deviating more than 1% from its original position. The relevant change is from the maximum position to the minimum position during the period (i.e., 1.4% in this case), not the net change from the most recently reported percentage. Proprietary 2016 Vinson & Elkins LLP

19 MEASURING 2% TEST A reporting person who files a Schedule 13G as an Exempt Investor under Rule 13d-1(d) must subsequently file a Schedule 13D within 10 days of any acquisition that, when added together with all other acquisitions by the reporting person of securities of the same class during the preceding twelve months, exceeds 2% of such class. The same calculation principles apply to the calculation of this 2% test as apply to the 1% test for determining material changes in beneficial ownership. In other words, for purposes of calculating the change in beneficial ownership in the context of Section 13(d)(6)(B) s exemption from Schedule 13D reporting, the numerator is the number of securities acquired and the denominator is the number of securities outstanding at the time of the first acquisition in the preceding 12 months. Proprietary 2016 Vinson & Elkins LLP

20 MEANING OF PROMPTLY

21 MEANING OF PROMPTLY The SEC has provided the following guidance regarding what promptly means in this context: The determination of what constitutes promptly under Regulation 13D-G is based upon the facts and circumstances surrounding the materiality of the change in information triggering the filing obligation and the filing person s previous disclosures. Any delay beyond the date the filing reasonably can be filed may not be prompt. SEC Release No Relevant facts include: The nature of the change; The likely effect of the change on the market; and The timing of past amendment filings. While the SEC has not defined promptly, best practice is to file amendments within one or two business days. Proprietary 2016 Vinson & Elkins LLP

22 GROUP FORMATION

23 GROUP FORMATION Whenever two or more persons are required to file a Schedule 13D or 13G with respect to the same securities and each person is eligible to use such Schedule, only one statement need be filed. Each person is responsible for the timeliness of the filing and for the completeness and accuracy of the information concerning such person contained therein. Such statement needs to identify and provide information with respect to each reporting person and include, as an exhibit, their agreement to jointly file such statement. Group members may, however, elect to make their own individual filings (such individual filings must still identify all members of the group but the information provided concerning the other persons making the filing need only reflect information which the filing person knows or has reason to know). Proprietary 2016 Vinson & Elkins LLP

24 GROUP FORMATION When two or more persons agree to act together for the purpose of acquiring, holding, voting or disposing of equity securities of an issuer, the group formed thereby shall be deemed to have acquired beneficial ownership of all equity securities of that issuer beneficially owned by any member of such group. No formal agreement is required for the creation of a group, and whether a group is formed depends on the particular facts. The following factors may establish a rebuttable presumption of the existence of a group: Communication among the parties; Common objective; and Acts in furtherance of the objective. However, a person who does not beneficially own any of the issuer s securities (independent of the other members of the group) cannot be deemed a member of a Section 13(d) group. See Rosenberg v. XM Ventures, 129 F. Supp. 2d 681 (D. Del 2001). Proprietary 2016 Vinson & Elkins LLP

25 PURPOSE OR EFFECT OF CHANGING/INFLUENCING CONTROL

26 PURPOSE OR EFFECT OF CHANGING/INFLUENCING CONTROL To qualify to file a Schedule 13G as either a Qualified Institutional Investor or a Passive Investor, the reporting person must not have acquired securities with the purpose or effect of changing or influencing control of the issuer (or in connection with or as a participant in any transaction having such purpose or effect). If such reporting person s intent with respect to changing or influencing control of the issuer changes, it must file a Schedule 13D within 10 days of such change. In addition, pursuant to Rule 13d-1(e)(2), From the time the person has acquired or holds the securities with a purpose or effect of changing or influencing control of the issuer, or in connection with or as a participant in any transaction having that purpose or effect, until the expiration of the tenth day from the date of the filing of the Schedule 13D... that person shall not: (i) Vote or direct the voting of the securities described therein; or (ii) Acquire an additional beneficial ownership interest in any equity securities of the issuer of the securities, nor of any person controlling the issuer. Proprietary 2016 Vinson & Elkins LLP

27 DUAL CLASS ISSUES IN IPO

28 DUAL CLASS ISSUES IN IPO In connection with a recent IPO, the SEC Office of Mergers & Acquisitions provided guidance regarding dual class stock structures in which the unregistered class is convertible into the registered class. When Exchange Act registration of Class A common stock became effective, each holder of Class B common stock was deemed to acquire beneficial ownership of a corresponding number of shares of Class A common stock. (See Rule 13d-5(a) or otherwise ). Because of that deemed acquisition of Class A common stock, persons who beneficially owned more than 5% of Class A common stock before the IPO could not rely on Rule 13d-1(d) to file a beneficial ownership report on Schedule 13G after year end; rather, they were required to report on Schedule 13D or Schedule 13G, as appropriate, within 10 days of the effectiveness of the registration statement. Proprietary 2016 Vinson & Elkins LLP

29 DUAL CLASS ISSUES IN IPO For purposes of calculating beneficial ownership percentage (since no shares of Class A common stock were outstanding before the IPO), the staff applied Rule 13d-3 (and particularly Rule 13d-3(d)(i)) in this circumstance to require the following calculation for persons owning shares before the offering and those who acquired shares in the offering: The numerator was the number of Class A shares the person acquired in the IPO plus the number of Class B shares owned by the person. The denominator was the actual number of Class A shares outstanding upon the closing of the IPO plus the number of Class B shares owned by the person. For example, if a person owned 400,000 shares of Class B stock and acquired 100,000 shares of Class A stock in the IPO, and there were 7,000,000 Class A shares outstanding upon the closing of the IPO, the person s beneficial ownership would be calculated as follows: (400, ,000) (7,000, ,000) = 6.8% (note that all percentages must be rounded off to the nearest one-tenth of one percent, as required by instruction (13) in the Schedule 13D cover page). Proprietary 2016 Vinson & Elkins LLP

30 DUAL CLASS ISSUES IN IPO The exception in Section 13(d)(6)(B) for acquisitions of 2% or less of the Class A common stock in 12 months did not apply to anyone with over 5% beneficial ownership of the Class A common stock upon completion of the IPO. This flows from the first point, in which the ownership of the Class B stock on the effective date was also treated as an acquisition, so total acquisitions for such persons was of course over 2%. Otherwise, 2% would be a fixed number based on the actual outstanding number of the class on the first acquisition in the 12 months. Proprietary 2016 Vinson & Elkins LLP

31 GENERAL INSTRUCTION C CONTROL PERSONS

32 GENERAL INSTRUCTION C CONTROL PERSONS General Instruction C to Schedule 13D provides that: If the statement is filed by a general or limited partnership, syndicate, or other group, the information called for by Items 2-6, inclusive, shall be given with respect to (i) each partner of such general partnership; (ii) each partner who is denominated as a general partner or who functions as a general partner of such limited partnership; (iii) each member of such syndicate or group; and (iv) each person controlling such partner or member. If the statement is filed by a corporation or if a person referred to in (i), (ii), (iii) or (iv) of this Instruction is a corporation, the information called for by the above mentioned items shall be given with respect to (a) each executive officer and director of such corporation; (b) each person controlling such corporation; and (c) each executive officer and director of any corporation or other person ultimately in control of such corporation. In other words, the information required by Items 2-6 must be provided for general partners, executive officers, directors and other control persons. Proprietary 2016 Vinson & Elkins LLP

33 HYPOTHETICALS FOR DISCUSSION

34 HYPOTHETICAL #1 2 CONTROL GROUPS Facts: Issuer has a greater than 20% controlling owner. Issuer brings in new money from a 3rd party, which becomes a 19.9% owner. Both groups have rights to appoint certain board seats. Both groups sign a Voting and Support Agreement. Questions: Are these large beneficial owners treated as two separate groups or a single group for purposes of Sections 13(d) or 13(g)? What if the Voting and Support Agreement applies only to the board seats of one of the beneficial owners? What if the Voting and Support Agreement applies to the board seats of both of the beneficial owners? What if the rights to one or both sets of board seats are by virtue of a class of preferred stock? Proprietary 2016 Vinson & Elkins LLP

35 HYPOTHETICAL #2 CONTROL GROUP AND M&A DEAL Facts: Issuer has a greater than 20% controlling owner. A buyer agrees to acquire the Issuer. The buyer asks the controlling owner to enter a Voting and Support Agreement. Questions: Does the buyer become subject to Sections 13(d) or 13(g)? Does it matter whether the Voting and Support Agreement includes a proxy? Proprietary 2016 Vinson & Elkins LLP

36 HYPOTHETICAL #3 FAMILY OFFICE Facts: A family office entity and affiliated entities/individuals report as a group. Questions: What securities does the group have to report together? What if the family office makes voting/investment decisions with respect to securities not held within the family office structure (e.g., securities held directly by one of the family members)? What about securities held directly by employees of the family office? Proprietary 2016 Vinson & Elkins LLP

37 HYPOTHETICAL #4 - WOLFPACK Facts: Two or more activist funds hold securities in the Issuer and appear to support each other in proxy fights and other activist activities (commonly referred to as a wolfpack ). There is no formal agreement among the activist funds to act together or support each other. Each fund insists that it is free to support or abandon the wolfpack at any time. Question: Are the members of the wolfpack required to file together as a group and report the aggregate securities held by the group? Proprietary 2016 Vinson & Elkins LLP

38 THANK YOU! Austin T Beijing T Dallas T Dubai T Hong Kong T Houston T London T Moscow T New York T Palo Alto T Richmond T Riyadh T San Francisco T Taipei T Tokyo T Washington T Proprietary 2015 Vinson & Elkins LLP Proprietary 2016 Vinson & Elkins LLP

39 SCHEDULES 13D & 13G OUTLINE SEC Hot Topics Institute Dallas, Texas September 8, 2016 Robert L. Kimball Vinson & Elkins LLP Michael G. Keeley Norton Rose Fulbright These materials are intended for educational and informational purposes only and do not constitute legal advice. These materials represent the views of and summaries prepared by the authors and do not necessarily reflect the opinions or views of their respective firms. US v.7 Proprietary 2016 Vinson & Elkins LLP

40 TABLE OF CONTENTS I. What are Sections 13(d) and 13(g)?... 1 II. Why were Sections 13(d) and 13(g) enacted?... 2 III. Which form should be used?... 2 IV. When are filings due and when must they be amended?... 5 V. Who is required to file? VI. VII. Does the existence of dual class (supervoting and single vote) IPO shares create any issues? Are there any pending, proposed amendments to the Section 13(d) reporting requirements? VIII. Additional SEC Interpretive Guidance IX. Where can I find some useful Section 13(d) and Section 13(g) resources? Appendix I: Schedule 13D/13G Initial Filing Decision Tree Appendix II: Schedule 13G Amended Filing Decision Tree

41 I. What are Sections 13(d) and 13(g)? A. Sections 13(d) and 13(g) of the Securities Exchange Act of 1934 (the Exchange Act ) require persons or groups who are or become the beneficial owners of more than 5% of a class of equity securities registered under the Exchange Act ( reporting persons ) to file a statement of their beneficial ownership with the Securities Exchange Commission ( SEC ) on Schedule 13D or Schedule 13G. B. Schedules 13D and 13G require the disclosure of the amount and nature of beneficial ownership and the reporting person s intent with respect thereto. Schedule 13G is considered a short-form filing because it requires information similar to, but less than, what is required on Schedule 13D. C. Schedule 13D 1. Among other things, reporting persons who are obligated to file a Schedule 13D must disclose the following: a. The number of shares beneficially owned (and whether the reporting person has sole or shared voting and investment power with respect thereto); b. The percentage of the issuer s outstanding shares that the reporting person s beneficial ownership represents; c. Information regarding the identity and background of the reporting person (including general partners, controlling persons, executive officers and directors); d. The source and amount of funds used to acquire the securities; e. The purpose of the transaction by which the securities were acquired; and f. The existence of any contracts, arrangements, understandings or relationships with respect to any securities of the issuer. 2. Exchange Act Section 13(d)(6) exempts the following transactions from the Schedule 13D reporting requirement: a. Acquisitions or offers to acquire securities made or proposed to be made by an issuer pursuant to a stock-for-stock exchange registered under the Securities Act of 1933 (see Section 13 C&DI Question ); b. Acquisitions of 2% or less of the class of securities during the preceding 12 months (on a rolling basis); and c. Acquisitions by an issuer of its own securities. 1

42 D. Schedule 13G 1. Among other things, reporting persons who are obligated to file a Schedule 13G must disclose the following: a. The number of shares beneficially owned (and whether the reporting person has sole or shared voting and investment power with respect thereto); b. The percentage of the issuer s outstanding shares that the reporting person s beneficial ownership represents; c. Information regarding the identity of the reporting person; and d. Certification as to certain facts that justify filing on Schedule 13G (as opposed to Schedule 13D). II. Why were Sections 13(d) and 13(g) enacted? A. The primary purpose of requiring certain beneficial owners to file statements on Schedule 13D or 13G is to give market participants, including other stockholders and registered issuers, notice of potential changes in control of registered issuers. III. Which form should be used? A. Unless reporting persons qualify to file on Schedule 13G by falling within one of the three categories identified below, they must file on Schedule 13D. B. Three categories of reporting persons may file on Schedule 13G instead of Schedule 13D: 1. Qualified Institutional Investors (Rule 13d-1(b)) a. Qualified Institutional Investors are persons who: i. acquired securities in the ordinary course of business and not with the purpose or effect of changing or influencing control of the issuer (or in connection with or as a participant in any transaction having such purpose or effect); and ii. are one of the following: a. registered broker dealer; b. bank; c. insurance company; d. registered investment company; 2

43 e. registered investment advisor; f. ERISA employment benefit plan; g. parent holding company or control person, subject to 1% rule; h. savings association; i. church plan; j. a non-u.s. institution that is the functional equivalent of any of the foregoing; or k. a group consisting solely of the foregoing. b. A Schedule 13G need only be filed by a Qualified Institutional Investor if its beneficial ownership is greater than 5% as of the end of the calendar year. Rule 13d-1(b)(2) provides that it shall not be necessary to file a Schedule 13G unless the percentage of the class of equity security specified in paragraph (i) of this section beneficially owned as of the end of the calendar year is more than five percent. In other words, no filing requirement is triggered if a person does not beneficially own more than 5% of a registered class as of the end of the year, despite having crossed above that threshold at some point during the year. 2. Passive Investors (Rule 13d-1(c)) a. Passive Investors are persons who: i. are not Qualified Institutional Investors; ii. iii. have not acquired securities with the purpose or effect of changing or influencing control of the issuer (or in connection with or as a participant in any transaction having such purpose or effect); and beneficially own less than 20% of the class. 3. Exempt Investors (Rule 13d-1(d); see also Section 13(d) C&DI Question ) a. Exempt Investors are persons who, as of the end of a calendar year, are or become the beneficial owners of more than 5% of the class and are not required to file a Schedule 13D because such person: i. is an issuer who acquired the securities pursuant to a registered stock-for-stock exchange; ii. acquired 2% or less of the class of securities during the preceding 12 months; or 3

44 iii. is otherwise not required to file a Schedule 13D (e.g., a person who holds more than 5% of a class of securities of an issuer prior to/at the time the issuer registers such class under Section 12 i.e., prior to/at the time of an IPO). b. Note that an Exempt Investor who, after an IPO but before filing a Schedule 13G, acquires additional securities that, when aggregated with other purchases during the preceding 12 months (including the IPO and pre-ipo period), exceeds 2% of the class must file a Schedule 13D. c. If an Exempt Investor forms a group with another individual or entity that is the beneficial owner of 2% or more of the class of securities, and the Exempt Investor is deemed to have voting or investment power over such securities, the Exempt Investor would be deemed to have acquired more than 2% of the class of securities and would therefore be required to file a Schedule 13D. d. A Schedule 13G need only be filed by an Exempt Investor if its beneficial ownership is greater than 5% as of the end of the calendar year. Rule 13d- 1(d) provides that a Schedule 13G is required if such person is or becomes directly or indirectly the beneficial owner of more than five percent of the relevant class of securities as of the end of any calendar year. C. Conversion from Schedule 13G to Schedule 13D 1. Qualified Institutional Investor (Rule 13d-1(b)) a. A Qualified Institutional Investor must file a Schedule 13D within 10 days after the reporting person: i. Determines that it no longer holds the securities: a. In the ordinary course of business (but may instead file on Schedule 13G if the reporting person qualifies as a Passive Investor); or b. Without the purpose or effect of changing or influencing the control of the issuer; or ii. Ceases to be the type of entity that qualifies as a Qualified Institutional Investor (i.e., a type of entity specified in Rule 13d- 1(b)(1)(ii)(A)-(K)) (but may file on Schedule 13G if the reporting person qualifies as a Passive Investor). b. If a Qualified Institutional Investor s investment intent changes, as described above, the reporting person shall not do any of the following 4

45 until the expiration of the 10th day following the date of filing a Schedule 13D: i. Vote or direct the voting of the reported securities; or ii. Acquire any additional securities of the issuer or any person controlling the issuer. 2. Passive Investor (Rule 13d-1(c)) a. A Passive Investor must file a Schedule 13D within 10 days after: i. Acquiring or holding the reported securities with the purpose or effect of changing or influencing the control of the issuer; or ii. The reporting person s beneficial ownership equals or exceeds 20% of the class of securities. b. If a Passive Investor s investment intent changes, as described above, the reporting person shall not do any of the following until the expiration of the 10th day following the date of filing a Schedule 13D: i. Vote or direct the voting of the reported securities; or ii. Acquire any additional securities of the issuer or any person controlling the issuer. 3. Exempt Investor (Rule 13d-1(d)) a. An Exempt Investor must file a Schedule 13D within 10 days after making an acquisition subject to or not exempt from Section 13(d) (e.g., acquiring more than 2% of the class of securities following the IPO and within a 12- month period). D. Reconversion from Schedule 13D to Schedule 13G 1. Rule 13d-1(h) permits reporting persons who initially filed on Schedule 13G, pursuant to Rules 13d-1(b) or 13d-1(c), but who then became required to report on Schedule 13D, to again file on Schedule 13G if the beneficial owner determines that it again qualifies under Rules 13d-1(b) or 13d-1(c) and that the provisions of Rules 13d-1(e), 13d-1(f) and/or 13d-1(g) no longer apply. E. Flow charts regarding initial and amended filings on Schedules 13D and 13G are attached hereto as Appendix I and Appendix II. IV. When are filings due and when must they be amended? A. Schedule 13D 5

46 1. Initial statements on Schedule 13D must be filed within 10 days after the event that triggered the reporting obligation (this includes a change in the reporting person s intent with respect to changing or influencing control of the issuer). a. Note that this is 10 calendar days (not business days). b. All deadlines that fall on a weekend or federal holiday are due the next business day, pursuant to Exchange Act Rule 0-3(a). 2. Amendments to Schedule 13D must be filed promptly following a material change in the facts set forth in the Schedule 13D. a. The facts and circumstances determine what constitutes a material change it could be a change in intent with respect to control of the issuer, entry into a contract regarding the securities, new plans to acquire additional securities, etc. i. Rule 13d-2(a) provides that [a]n acquisition or disposition of beneficial ownership of securities in an amount equal to one percent or more of the class of securities shall be deemed material. ii. The relevant percentage is the number of securities acquired/disposed of divided by the number of securities outstanding before the first such acquisition/disposition (i.e., not the change in the reporting person s ownership percentage). a. For example, if a reporting person holds 7,000 out of 100,000 outstanding shares (7%), the issuer issues another 20,000 shares, and the reporting person acquires 1,400 of such shares (7% of the issued shares), the reporting person still holds 7% of the outstanding shares (8,400 / 120,000). b. However, for purposes of determining whether the reporting person has acqui[red] or dispos[ed] of beneficial ownership of securities in an amount equal to one percent or more of the class, the reporting person must divide the amount acquired (1,400) by the amount outstanding preissuance (100,000), which results in a 1.4% change and triggers an obligation to file an amendment. iii. Additionally, the deviation from the reporting person s ownership percentage as reported on the most recently filed Schedule 13D (or amendment) is not the relevant percentage, but rather the difference between the maximum and minimum number of shares held at any given time following the most recent filing. 6

47 B. Schedule 13G a. For example, if a reporting person holds 7.0% of the relevant class of securities, makes an acquisition that increases its ownership percentage to 7.5%, and then makes a disposition that reduces its ownership percentage to 6.1%, it has a reporting obligation despite never deviating more than 1% from its original position. b. The relevant change is from the maximum position to the minimum position during the period (1.4% in this case), not the net change from the most recently reported percentage. b. The SEC has provided the following guidance regarding what promptly means in this context: The determination of what constitutes promptly under Regulation 13D-G is based upon the facts and circumstances surrounding the materiality of the change in information triggering the filing obligation and the filing person s previous disclosures. Any delay beyond the date the filing reasonably can be filed may not be prompt. SEC Release No i. Relevant facts include: a. The nature of the change; b. The likely effect of the change on the market; and c. The timing of past amendment filings. c. While the SEC has not defined promptly, best practice is to file amendments within one or two business days. 1. Initial statements on Schedule 13G must be filed within 10 days after the event that triggered the reporting obligation or within 45 days after the end of the calendar year in which the person became obligated to file, depending on which provision the person is relying on. a. Rule 13d-1(b) 45 days after year-end (or 10 days after the end of the first month in which the person s beneficial ownership exceeds 10% of the class of securities) b. Rule 13d-1(c) 10 days after event c. Rule 13d-1(d) 45 days after year-end d. Note that this is 10/45 calendar days (not business days). 7

48 e. All deadlines that fall on a weekend or federal holiday are due the next business day, pursuant to Exchange Act Rule 0-3(a). 2. Amendments to Schedule 13G generally must be filed within 45 days after the end of the calendar year if, as of the end of the calendar year, there are any changes in the information reported in the previous filing. a. The Schedule 13G does not need to be amended if there has been no change to the information disclosed in the Schedule or if the only change is to the percentage of securities owned by the filing person resulting solely from a change in the aggregate number of the issuer s securities outstanding. See Rule 13d-2(b) and Exchange Act Release No (October 28, 1982). Section 13(d) C&DI Question There are two exceptions to the general rule that Schedule 13Gs need only be amended within 45 days after the end of the calendar year: C. Trade Date a. Qualified Institutional Investors under Rule 13d-1(b) must file an amendment within 10 days after the end of the first month in which beneficial ownership exceeds 10% of the class of securities (computed as of the end of the month). i. Thereafter, Qualified Institutional Investors must also file an amendment within 10 days after the end of the first month in which beneficial ownership increases or decreases by more than 5% of the class of securities (computed as of the end of the month). b. Passive Investors under Rule 13d-1(c) must file an amendment promptly upon their beneficial ownership exceeding 10% of the class of securities. i. Thereafter, Passive Investors must file an amendment promptly upon their beneficial ownership increasing or decreasing by more than 5%. 1. The SEC has clarified that the relevant start date for purposes of calculating the 10-day filing deadline is the trade date (as opposed to the settlement date), with the day after the trade date counting as day one. The Schedule 13D beneficial ownership report must be filed within 10 days of the trade date of the securities transaction. Section 13(d) C&DI Question D. Disclosure Current Through Filing 1. The disclosure in an initial or amended Schedule 13D should be current through the date that the beneficial owner files the report. Section 13(d) C&DI Question

49 2. In practice, reporting persons should use a reasonable cut-off date (e.g., it would probably be reasonable to omit information regarding 10b5-1 sales that occur the same day that the amendment is filed). E. Failure to File Multiple Amendments 1. If the security holder failed to file multiple amendments to the Schedule 13D when required, it may disclose that information by filing multiple amendments or filing one combined amendment. Regardless of the approach taken, the security holder must ensure that the filings contain the information that it should have disclosed in each required amendment, including the dates and details of each event that necessitated a required amendment. Section 13(d) C&DI Question F. Exit Filing 1. Beneficial owners who file a Schedule 13D or Schedule 13G are subject to the requirements of Section 13 until they file a Schedule 13D or Schedule 13G, respectively, reporting that they no longer beneficially own more than 5% of the issuer s outstanding securities. See Section 13(d) C&DI Question G. Consequences of Failure to Timely File 1. Under Section 21 of the Exchange Act, the SEC may pursue any of the following civil penalties against individuals/groups that fail to comply with Sections 13(d) and/or 13(g): a. Injunctions; b. Cease and desist orders; and c. Monetary fines. 2. Criminal sanctions may also be imposed under Section 32 of the Exchange Act for willful violations of Sections 13(d) and/or 13(g). Penalties may include: a. Monetary fines up to $5,000,000; b. Imprisonment for up to 20 years; and/or c. Disgorgement. 3. Examples of recent enforcement actions: a. In March 2015, the SEC charged eight officers, directors and major shareholders for failing to update their stock ownership disclosures to reflect material changes, including steps to take the companies private. In 9

50 settlement of their cases, the individuals agreed to pay financial penalties ranging from $15,000 to $75,000. i. The SEC s orders find that the respondents took steps to advance undisclosed plans to effect going private transactions. Some determined the form of the transaction to take the company private, obtained waivers from preferred shareholders, and assisted with shareholder vote projections, while others informed company management of their intention to privatize the company and formed a consortium of shareholders to participate in the going private transaction. As described in the SEC orders, each respective respondent took a series of significant steps that, when viewed together, resulted in a material change from the disclosures that each had previously made in their Schedule 13D filings. SEC Press Release No , dated March 13, b. In September 2014, the SEC announced charges against 28 officers, directors and major shareholders for failing to promptly report information about their holdings and transactions in company stock and six publiclytraded companies were charged for contributing to filing failures by insiders or failing to report their insiders filing delinquencies. Of the 34 individuals and companies named in the SEC s orders, 33 agreed to settle the charges and pay financial penalties totaling $2.6 million. i. Using quantitative analytics, we identified individuals and companies with especially high rates of filing deficiencies, and we are bringing these actions together to send a clear message about the importance of these filing provisions, said Andrew J. Ceresney, Director of the SEC s Division of Enforcement. Officers, directors, major shareholders, and issuers should all take note: inadvertence is no defense to filing violations, and we will vigorously police these sorts of violations through streamlined actions. SEC Press Release No , dated September 10, Private remedies for filing a fraudulent or misleading Schedule 13D or Schedule 13G are also available under Section 10(b) and Rule 10b-5 under the Exchange Act. V. Who is required to file? a. Such private remedies are not explicit under Section 10(b) or Rule 10b-5 but are instead established by case law. A. Beneficial Ownership - Definition 10

51 1. A person beneficially owns securities for purposes of Sections 13(d) and 13(g) if such person directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: a. Voting power which includes the power to vote, or to direct the voting of, such security; and/or, b. Investment power which includes the power to dispose, or to direct the disposition of, such security. 2. Further, a person is deemed to beneficially own securities if such person has the right to acquire beneficial ownership of such security... within sixty days (including any right to acquire through the exercise of any option, warrant or right, the conversion of a security, pursuant to the power to revoke a trust, discretionary account, or similar arrangement, and pursuant to the automatic termination of a trust, discretionary account or similar arrangement). 3. If an individual controls an investment adviser that holds registered securities and also has personal holdings of such securities, the individual must add the holdings together for purposes of calculating the total percentage of the securities that are beneficially owned, for Section 13 purposes. B. Calculation of Beneficial Ownership Percentage 1. In determining the percentage of a class of securities beneficially owned, a reporting person divides the number of outstanding securities of such class, exclusive of any securities of such class held by or for the account of the issuer or a subsidiary of the issuer (i.e., exclusive of treasury shares). 2. If a reporting person has the right to acquire beneficial ownership of securities within 60 days, such number is added to the number of shares of the issuer outstanding (i.e., the denominator), but only for purposes of calculating such reporting person s beneficial ownership percentage (i.e., such securities need not be added to any other reporting person s denominator). See Rule 13d-3(d)(1). 3. Example: a. Company A has 1,000,000 shares of common stock outstanding. b. Shareholder B owns: i. 50,000 shares of common stock. ii. Options to acquire 50,000 shares of common stock. B s options were granted January 1, 2014, and vest in 20% increments (10,000 shares) on each of the first five anniversaries of the date of grant. 11

52 iii. Warrants to acquire 30,000 shares of common stock, all of which are currently exercisable. c. Shareholder C owns: i. No shares of common stock. ii. iii. Options to acquire 75,000 shares of common stock. C s options were granted May 1, 2014, and vest in 20% increments (15,000 shares) on each of the first five anniversaries of the date of grant. 5,000 shares of preferred stock that are currently convertible into 25,000 shares of common stock. d. B s beneficial ownership as of April 15, 2016, is calculated as follows: 50, ,000 (1) + 30,000 (2) 100,000 = 1,000, ,000 (1) + 30,000 (2) 1,050,000 = 9.5% (1) Shares issuable pursuant to options that are currently exercisable; no additional options will become exercisable within 60 days of April 15, (2) Shares issuable pursuant to warrants. e. C s beneficial ownership as of April 15, 2016, is calculated as follows: 30,000 (1) + 25,000 (2) 55,000 = 1,000, ,000 (1) + 25,000 (2) 1,055,000 = 5.2% (1) 15,000 shares issuable pursuant to options that are currently exercisable and 15,000 shares issuable pursuant to options that will become exercisable on May 1, 2016 (i.e., within 60 days of April 15, 2016). (2) Shares issuable upon conversion of preferred stock that is currently convertible. C. Groups 1. Whenever two or more persons are required to file a Schedule 13D or 13G with respect to the same securities and each person is eligible to use such Schedule, only one statement need be filed. 12

53 a. Each person is responsible for the timeliness of the filing and for the completeness and accuracy of the information concerning such person contained therein. b. Such statement needs to identify and provide information with respect to each reporting person and include, as an exhibit, their agreement to jointly file such statement. c. Group members may, however, elect to make their own individual filings (such individual filings must still identify all members of the group but the information provided concerning the other persons making the filing need only reflect information which the filing person knows or has reason to know). 2. When two or more persons agree to act together for the purpose of acquiring, holding, voting or disposing of equity securities of an issuer, the group formed thereby shall be deemed to have acquired beneficial ownership of all equity securities of that issuer beneficially owned by any member of such group. No formal agreement is required for the creation of a group, and whether a group is formed depends on the particular facts. The following factors may establish a rebuttable presumption of the existence of a group: a. Communication among the parties; b. Common objective; and c. Acts in furtherance of the objective. 3. However, a person who does not beneficially own any of the issuer s securities (independent of the other members of the group) cannot be deemed a member of a Section 13(d) group. See Rosenberg v. XM Ventures, 129 F. Supp. 2d 681 (D. Del 2001). D. Family Members 1. The SEC has said that a spouse is not deemed the beneficial owner of the securities reported on Schedule 13D or Schedule 13G by virtue of his or her marital relationship alone. 2. [A]n analysis of the facts and circumstances is necessary in determining whether a husband, wife or child beneficially owns shares held by another family member sharing the same household. The relationship between family members should be analyzed to determine whether a family member directly or indirectly either has or shares voting and/or dispositive power over the shares held by any other family member living in the same household. Section 13(d) C&DI Question E. Exceptions to Beneficial Ownership 13

54 1. Members of national securities exchanges (i.e., broker/dealers) who direct the voting of securities as permitted by the rules of the exchanges are not deemed to beneficially own such securities. (Rule 13d-1(d)(2)) 2. Rule 13d-1(b)(ii) pledgees (e.g., broker/dealers, banks, etc.) are not deemed to beneficially own pledged securities until they take steps to declare a default (if they have not been granted the power to vote or dispose of the securities prior to a default). (Rule 13d-1(d)(3)) 3. Underwriters in a firm commitment underwriting are not deemed to beneficially own the securities acquired until 40 days after the date of acquisition. (Rule 13d- 1(d)(4)) F. Disclaimer of Beneficial Ownership 1. Any person may expressly declare in any statement filed that the filing of such statement shall not be construed as an admission that such person is, for the purposes of sections 13(d) or 13(g) of the Act, the beneficial owner of any securities covered by the statement. (Rule 13d-4) G. Rule of Three 1. A 1987 no-action letter issued by the SEC to Southland Corporation gave rise to what is commonly referred to as the rule of three, which is the notion that if a person does not have the authority to sell securities without the approval of others and such securities may be sold despite such person s objection, that person does not beneficially own the securities. 2. In other words, where voting and investment decisions regarding an entity s portfolio securities are made by three or more individuals, and a voting or investment decision requires the approval of a majority of those individuals, then none of the individuals is deemed a beneficial owner of the entity s portfolio securities. Romeo & Dye Section 16 Treatise 2.03[5][i]. 3. While the SEC has informally acknowledged this principle, it has not officially done so and practitioners who rely on it should be aware that this is not a principle that has been formally acknowledged or accepted by the SEC. VI. Does the existence of dual class (supervoting and single vote) IPO shares create any issues? A. In a recent IPO of a company whose unregistered Class B common stock was convertible into its to-be-registered Class A common stock, the SEC opined that a deemed acquisition of Class A common stock occurred with respect to any shares of Class B common stock held at the time the Exchange Act registration became effective. B. Because of such deemed acquisition of Class A common stock, persons who beneficially owned more than 5% of Class A common stock before the IPO could not rely on Rule 13d-1(d) to file a beneficial ownership report on Schedule 13G after year end; rather, 14